California Trust, Estate & Probate Litigation

The most important interrogatory in California is Form Interrogatory 15.1. Propound it; meet and confer on it; file motions to compel on it. Make them give you their facts, witnesses, and documents supporting their denials and affirmative defenses. Form Interrogatory 15.1 is the great equalizer in California trust and probate litigation.

I recently had the pleasure of speaking with Kate Ashford, a freelance journalist who occasionally writes “The Help Desk” column for CNNMoney online.  Her question was a common one: how are gifts taxed?  There is a lot of confusion on how gifts are taxed, and to whom they are taxed.  Here’s a few tips to sort out taxes relating to gifts:

What type of tax are you talking about?

There are different types of taxes that could potentially apply to gifts, namely, income tax and gift tax. 

Income Taxation of Gifts.

As a general rule, gifts you receive from others are not included in your income tax.  In other words, any amount received by you as a gift is completely tax-free (same rule applies to inheritances too).  Of course, this assumes that the amount received is actually a bona-fide gift.  You can’t try to fool the IRS by passing off a large bonus from your work as a gift.  But if you honestly receive a gift from a family member, for example, then there’s no income tax to you.  It doesn’t matter if its $1.00 or $1,000,000, it’s a tax-free gift to the recipient.

Don’t confuse gifts with things such as gambling winnings, lottery prizes, game-show loot, or receiving the HGTV Dream Home (if you are so lucky)—all of those cash and prizes are subject to income tax when, or rather if, you receive them.

Gift Tax.

Gifts are subject, however, to our Gift and Estate Tax rules, which obligates the grantor (that is the person GIVING the gift) to pay tax on all gifts made.  Read that again: the person making the gift is obligated to pay the tax—not the person receiving it.  Sounds ridiculous?  Maybe.  But that’s our gift tax system; if you’re going to be generous by giving a gift, then you may have to give an extra gift to Uncle Sam.

To begin with, you should also think that all gifts are taxable.  There are a few exceptions, but if you don’t fit within one of the exceptions, then prepare to be generous to the IRS.

The Exceptions to Gift Tax.

Annual Gift Tax Exclusion.  Every person has the right to gift up to $13,000, per person, per year.  These annual exclusion gifts do not have to be reported to the IRS.  The “per person, per year” requirement means that a single person can make multiple gifts to different people each year.  So a grandfather could gift up to $13,000 to each of his children, and each of his grandchildren and not have to report the gifts, provided that no one person received more than $13,000 in a given year.

Many people remember the annual exclusion gifts as being the annual $10,000 gifts.  That is the prior gift tax exclusion amount before they were indexed for inflation.  The annual gift amount is now $13,000.

Marital Deduction.  Spouses can gift each other an unlimited amount of gifts and pay no gift tax whatsoever.  The only requirement is that the couple must be legally married.  Sounds simple, but it can be tricky at times. 

For example, California does NOT recognize common-law marriage, unless such marriage is established in another State that does recognize common-law marriage (such as Texas).  Also, California does not recognize same-sex marriage (remember Proposition 8?).  California does allow same-sex partners to register and thereby receive many of the same benefits and obligations as married couples, but not the status of legal marriage. 

Gift Tax Exclusion.  Under our current Estate and Gift Tax laws, every individual is allowed an exclusion from gift and estate tax equal to $5,000,000.  This means that you can give up to $5,000,000 away and not have to pay a gift tax on that transfer.  However, any amount of exclusion you use during your lifetime by making gifts, reduces what you have left for your estate.  So if you gift $2,000,000 during your lifetime, you pay no gift tax, but your Estate Tax exclusion is reduced from $5,000,000 to $3,000,000 to account for the $2,000,000 of exclusion you used while alive.

Gifts in any single year to a single person that exceed $13,000 must be reported to the IRS using a Gift Tax Return (Form 709) even though no tax will be due on the return.  This reporting requirement allows the IRS to track gifts made over your lifetime to determine when, and if, you exceed you tax-free limit.

Charitable Gifts.  As you would expect, gifts made to charity, in any amount, are free of gift tax.  Luckily the IRS is not so callous as to require a generous donor to pay tax on gifts to charity. 

But beware, the charity must be recognized as a valid charity by the IRS under Internal Revenue Code Section 501(c)(3).  Always ask to see proof of a charity’s determination letter before making any large gifts to charity, and then confirm the charity’s status with the IRS because sometimes charitable status can be revoked by the IRS.

Tax Law Changes.

Tax laws these days are very fickle things.  The current set of laws for Estate and Gift Tax are set to expire at the end of 2012, meaning that a whole new set of rules will be put in place.  We have no way of knowing if the rules will be better or worse than what we have now.  So you have to keep an eye out for future developments.

The bottom line: no good dead goes unpunished.  Giving ‘till it hurts really can hurt if you don’t plan out your gifting ahead of time.

The trickery of the English language can be fatal in the enforcement of Wills and Trusts, as California’s Second Appellate District reminds us in its recent decision in Estate of Irving Duke.  Justice Suzukawa writes the opinion about Mr. Duke’s Will, where his two nephews—who are not even mentioned in the Will—receive Mr. Duke’s entire $5 million fortune to the exclusion of the two named charitable beneficiaries in the Will—City of Hope and Jewish National Fund.  The charities were supposed to divide the $5 million equally between themselves.

The Wayward Will

But what is “supposed” to happen and what actually happen under the law can, sometimes, be very different.  So what went wrong?  The English language—it can be tricky (see my earlier blog post on this topic).  The terms of the Will were the real culprit, and the Will was drafted by Mr. Duke by his own hand (called a “Holographic” Will).  The Will terms stated:

“I hereby give, bequeath and devise all of the property of which I may die possessed, whether real, personal or mixed, whether heretofore or hereafter acquired to my bellowed wife, Mrs. Beatrice Schecter Duke…

Should my wife Beatrice Schedcter Duke and I die at the same moment, my estate is to be equally divided…one half to be donated to the City of Hope in the name and loving memory of my sister, Mrs. Rose Duke Radin….One half is to be donated to the Jewis National Fund to plant trees in Israel in the names and loving memory of my mother and father…”

Irving Duke’s wife, Beatrice, died in July 2002, and Irving died in November 2007 (over five years later).  They had no children. 

After Irving’s death, the charities proceeded to file for probate thinking they were the rightful heirs of the estate given that Beatrice had died before Irving.  But Irving’s two nephews (referred to as the “Nephews”) had another idea.  They asked the Court to clarify who in fact were heirs of the Estate.

The Nephews’ Interpretation of the Will

The Nephews said that Irving and Beatrice did not die “at the same moment” as the Will language stated, therefore the gift to the two charities were not valid because the necessary condition of Irving and Beatrice dying “at the same moment” did not occur—Beatrice died many years before Irving.

The Charities’ Interpretation of the Will

The charities naturally disagreed and wanted to provide evidence to the Court to demonstrate that the Dukes wanted to benefit these charities.  In fact, Mr. Duke had given the City of Hope a gift of $100,000 on January 7, 2004 and another $100,000 on January 30, 2004.  He told the City of Hope representative at that time that he was “leaving his estate to the City of Hope and to the Jewish National Fund” and said in such a way as though his Will had already been prepared to that effect.

The Court Sides With the Nephews

The Nephews argued that the Court was not permitted to consider any evidence outside the terms of the Will itself because—get this—the Will terms were not ambiguous.  The Trial Court agreed saying that:

(1) the Will terms were not met,

(2) therefore the gift could not go to the charities, and

(3) since the Will contained no provision for the distribution of the estate if Beatrice died before Irving (rather than “at the same moment”), the estate instead defaulted to Mr. Duke’s “heirs-at-law”, which were the two Nephews. 

The charities appealed—looking for someone to see the true intent of Mr. Duke.  But the appeal was lost because the Trial Court was right. 

Under California law, Courts are not allowed to look beyond the Will document itself unless that is necessary to interpret an uncertain term in the Will.  (See PC 6111.5.)  Since the Will terms are presumed to be the full statement of the Decedent’s desires, the terms must be enforced as written. 

In Mr. Duke’s case, the Court presumes that he only wanted the charities to take the estate if he and his wife died at the same moment.  And since they did not do so, that term did not arise and the gift is not enforced.  In other words, there are no uncertain terms in Mr. Duke’s will.  He outlined a scenario of he and his wife dying simultaneously that never occurred.  And the Court does not have the power to re-write the Will terms just because it thinks that is what Mr. Duke wanted. 

Justice Suzukawa does point out that it is difficult to imagine that Irving only wanted the gifts to charity to take effect if he and his wife died simultaneously.  Especially since Irving made two gifts of $100,000 to the City of Hope after his wife’s death.  But the Court was compelled to follow an earlier California Supreme Court case (Estate of Barnes—a nearly identical case with the same result), which took the option of siding with the charities “out of [the Court’s] hands.”

The bottom line is: words make a difference.  Had Irving’s Will been unclear on its face, then outside evidence could be used to interpret his intent.  But when the language is clear on its face (albeit confusing, or even unfair, in its application) then the Will is enforced as written—exactly as written.  

Nobody Likes Motions to Compel:

 Plaintiff attorneys don’t like them because they aren’t paid an hourly fee to draft them; Defense attorneys don’t like them because they know how effective these motions are at slicing through their procedural gamesmanship; and Judges don’t like them because these motions take up valuable court time with juvenile spats between grown adults—lawyers—who simply can’t agree on anything.

 Motions to Compel are Necessary:

 But Motions to Compel are necessary and required for most cases. Filing a motion to compel immediately does three things:

 Put Defense Attorneys on Notice:

 First, it puts the defense attorney on notice that you are not like some plaintiff attorneys who simply take cases in bulk and settle for pennies on the dollar. These types of attorneys generally do not bring motions to compel and live with the responses and documents the defense attorney chooses to give them. But filing a well-drafted motion to compel informs your adversary that you are not like some plaintiff attorneys.

 Dictate the Relationship Between Yourself and the Defense Attorney:

 Second, by filing the motion to compel, you dictate the relationship between yourself and the defense attorney. You are establishing that you require the defense to provide valid responses, as well as all non-privileged documents, pertaining to the case. Ironically, it’s been my experience that the relationship with defense counsel generally improves after filing several motions to compel.

 Establish That You Believe in Your Client’s Case:

 Third, by filing the motion to compel, you establish that you believe in your client’s case and are willing to put your valuable (and finite) time and resources into helping your client’s cause. Attorneys that don’t believe in their client’s case are unlikely to bring motions to compel. And defense attorneys know that a plaintiff’s attorney is unlikely to take a case to trial if he/she does not believe in it. 

 The Outcome:

 In many cases, once you’ve filed the motion to compel, the defense attorney will call you a week or so before the motion hearing date, concede, and ask if you will withdraw the motion if they provide the answers or documents you are seeking.

 But in other cases, the defense will press its luck to see what the Court will say about your motion. In the end, it really doesn’t matter if you win or lose your motion. (I’ve lost some motions I was sure to win, and won others I was sure to lose. There’s no rhyme or reason to it). What matters is that you file the motion. Once filed, you establish that you are a good lawyer who requires proper responses from the defense—and, now, you’ll likely begin to get them. Try it out in your current or next case. See for yourself how well it works. 

Responding to written discovery can be overwhelming. In most cases defense attorneys send the bulk of written discovery early on in a lawsuit. This discovery generally includes Form Interrogatories, Special Interrogatories, Requests for Admission, and Demands to Produce. Due to the size and expansive scope of this discovery one can become overwhelmed by it and tend to put it off until the last minute. Of course putting it off leads to stress, resulting in either poorly drafted last-minute responses (leading to defense motions to compel), or asking defense counsel for an extension of time to respond (which means asking for a favor.)

A better option is to establish a workflow for responding to discovery before it is ever received. Then, once your workflow is in place, it is triggered and implemented when discovery is received.

The essential components of an effective workflow for responding to discovery includes the following:

Form Interrogatories:

Obtaining completed answers to likely Form Interrogatories from your client before you receive Form Interrogatories. I usually go over the Form Interrogatories with my client before I file the lawsuit, or shortly thereafter. In any event, I do it well before a defense attorney sends discovery.

 Once I complete the likely responses I simply save them in my file to include in future formal responses I will need to provide once Form Interrogatories are actually received.

Documents:

Obtaining all documents (and things) in your client’s possession pertaining to the lawsuit before the lawsuit is filed (or shortly thereafter). This is important. Don’t think you can get all these documents once you receive the Document Demand from opposing counsel. Get every document from your client, including privileged documents, before the lawsuit is filed.

 Once I have these documents, I scan them into my case management system under a file named “Documents”. I then break these documents down into natural categories, i.e., Communications, Special Damages, Medical Records, Medical Billing, FDA, Bank Account Info, Attorney-Client Communications, Photographs, 911 Transcripts, 911 Phone Calls, etc.  

Contact information:

Obtaining the names, addresses, and phone numbers of all individuals and entities that have (or may have) documents pertaining to the lawsuit before it is filed (or shortly thereafter). This is important. If your client does not have actual possession of responsive documents after making a good-faith effort to find them, then the Discovery Act requires your client to identify any individuals or entities that may have these documents.

 I enter all names, addresses, and phone numbers of these individuals and entities into my case management system indicating that they may have documents pertaining to my client’s case. It always surprises me how long this list of names gets when you actually think about all individuals and entities that may have documents pertaining to your client’s case.

Objections:

A list of likely objections to improper discovery requests. I’ve built this list up over time and find it very useful to review as I respond to each discovery request. I keep theses objections in a handy application, which I use when responding to discovery.

Self-imposed deadline:

Simply stated, respond in 48 hours or less.

And that’s it! You now have a feasible workflow for responding to discovery. In my next blog post I will introduce an application that significantly reduces the time it takes to respond to discovery—thus ensuring you make your 48-hour deadline.